I Saw It Coming

Yesterday, I spent most of my time marketing my new business endeavor and I had a great time rekindling several business relationships and talking with several friends who happen to be truck dealers.

During our conversations, it became blatantly obvious how impactful the new emissions regulations have been to the truck sales industry. Especially in California. Many of my friends spent hundreds of thousands of dollars purchasing equipment that did not meet the new regulations. 

They were betting that they would be able to sell their entire stock of inventory before the regulations came into effect. What they did not foresee is that many of the finance companies would stop funding these assets long before the compliance deadline. 

Many of them were concerned that the price of 2008 newer trucks was still high, and they may still be a little bit artificially inflated. However, from a finance company's point of view these trucks are far less risky because they depreciate at a much slower rate because they do not have an (artificially created)end-of-life within two years.

If you look at the simple economics of a finance transaction, it is clearly more profitable and more secure to fund these newer assets. 

For example (breaking out my trusty 12c):

• If you have a 2006 truck selling for $23,000, with a term of 18 months you would need an APR of 24% just to earn a little over $4000 interest income (which doesn't include any debt cost) 

• If you are financing eight 2008 emissions compliant truck for $59,000 you would be able (based on mileage) to fund the asset for 42 months which, at an 11% APR would yield just over $12,000.

Not only does this make more sense for the finance company but, also for the customer. 

Considering they will have a longer useful life of the truck and the difference between payment is normally less than $200 a month.

It appears that the upcoming environmental regulations will be a knife that cuts both ways. In many ways it is spurred truck sales for those with inventory that meets environmental regulations, while at the same time drastically affecting those who only have non-compliant inventory.

I would also like to give those in the industry another hint:

 What happens to an asset’s useful life depreciation if it's artificially shortened?

I hope that you found today's blog useful and (Shameless Plug)I would like to invite everybody to visit my new website (www.spotlightfinancial.net) where you can order many useful services tailored not only for dealerships and end-users but also for finance companies as well.

Thanks again,

John